The recently formed Consumer Financial Protection Bureau (CFBP) is an arm of the US Treasury accountable to no one and funded independent of Congress, charged with taking consumer complaints (seemingly at random with no limiting criteria) and doing something about them (what, exactly, is uncertain). It should be renamed the FFEB.

The CFBP stated mission: “Our mission is to make markets for consumer financial products and services work for Americans — whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products.” Yes, you are right, that mission statement has no meaning whatsoever. They do get more specific, however, with this list:

Congress established the CFPB to protect consumers by carrying out federal consumer financial laws. Among other things, we:

• Write rules, supervise companies, and enforce federal consumer financial protection laws
• Restrict unfair, deceptive, or abusive acts or practices
• Take consumer complaints
• Promote financial education
• Research consumer behavior
• Monitor financial markets for new risks to consumers
• Enforce laws that outlaw discrimination and other unfair treatment in consumer finance

For each bullet point above we need to ask some questions. To what purpose? At whose expense? For what benefit?

Effectively, CFPB forces banks, depositors, borrowers, credit and debit card users, and those paying income tax to pay to supposedly “protect” the financially illiterate from their own illiteracy as the cost of compliance and enforcement is necessarily built into the pricing of the products being regulated and taxpayers contribute to the nearly $500 million annual CFPD budget.

But wait.

• There are already hundreds of books and reference sources for consumers to learn about the risks and consequences of financial commitments they may make.
• We already have extensive Federal and State consumer finance laws that cover essential disclosure and procedural requirements.
• We already have non-profit and industry group efforts to educate consumers on financial literacy in addition to Federal programs to be consolidated within CFPB.

So, why does the CFPB exist?

The CFPB’s effective mission statement is “to use the unaccountable power of the Federal government to extort monetary and political concessions from companies offering consumer financial products and services — mortgages, credit cards, or any number of other consumer financial products.”

I would think the above wording severe except for the realities of how the CFPB is actually operating. Two recent articles in the Wall Street Journal clarify that CFPB is merely a political entity.

“Consultants Snap Up Alumni of Consumer Watchdog Agency” confirms that the industry is already co-opting the loyalties of people who work for CFPB.

“Banks Seek a Détente With New Consumer Bureau” confirms the industry and CFPB management are working together in private to reach accommodations hidden from public view. In other words, “we will do the this if you do that” and all consumers of financial services as well as the general taxpayer pay for the cost of regulation, compliance, and the cost of the agency itself.

CFPB will contribute zero improvement in consumer education at the margin and will do nothing but increase costs to consumers and taxpayers. This is clear from readily observable voluntary consumer behavior the CFPB (and anyone else) can do nothing about. Two examples of such behavior are “rent to own” and State lotteries.

You can purchase a 60 inch Sharp LCD television with Wi-Fi for less then $1,000 today, or you can “rent to own” an equivalent television from Aaron Rents for 24 monthly payments of $142.98, totaling $3,431.51. Effectively, with “rent to own” you are borrowing $1000 for 24 months at a cost of $2,431 resulting in an Annual Percentage Rate of 164%. This is perfectly legal and fully disclosed today, yet there is a market for this, people voluntarily sign up for this.

Perfectly legal lotteries (the Powerball jackpot odds are one in 175 million) and other forms of legalized gambling exist. Over $57 billion in lottery tickets were sold in the US in 2011. The States permit lotteries and gambling to get a rake-off (money) from the willingness of consumers to gamble (as it has been clearly demonstrated that such gambling would exist underground if illegal).

So, where is the Consumer Financial Protection Bureau to “protect” those poor souls “renting to own” and participating in legal lotteries and legal gambling? The only difference between consumers voluntarily using financial services and voluntarily buying lottery tickets/gambling is that there have been disclosure requirements governing financial services before CFBP existed and no disclosure requirements governing legalized lotteries and gambling. The absence of such disclosure results from the vested financial interest of the States. The States actually spend money advertising, telling you lotteries and gambling are “games” while CFPB (as a small example) requires banks to put signs on ATM’s disclosing that there may be a fee for using that service (but you already knew that).

Those who established CFPB believing it would help consumers need to take a closer look at the real world. CFPB is just another Federal power grab over the financial industry and a self-perpetuating bureaucracy that adds cost and complexity for the very consumers its claims to “protect.”

CFPB is another Federal bureaucracy that costs us half a billion to a billion dollars a year that does more harm than good and needs to be closed down.

Regards, Pete Weldon
americanstance.org

The recently formed Consumer Protection Bureau (CFBP) has regulations concerning disclosures on bank teller machines, Loan Originator Compensation Requirements, and credit card fees, among many others. Isn’t it about time that those purchasing lottery tickets had the same protections?! By God!

I recently filed the following complaint with CFPB here (its the only complaint category that seems to apply) on behalf of those who buy Powerball lottery tickets.

Dear CFBP:

I became interested in the recent “$590,500,000.00” Powerball lottery and found I had been subjected to unfair and deceptive practices. Why don’t we have laws to stop state lotteries from exploiting citizens who don’t understand math and statistics and freely buy lottery tickets without understanding what they are signing up for? Given CFPB’s earnest efforts to protect the innocent in consumer finance I am counting on CFPB to hold state lotteries accountable for their unfair, deceptive, and abusive practices as is your mission.

Lottery jackpots are deceptively advertised, unfair, and abusive.

Advertisements and public relations efforts broadly disseminated information that the Powerball jackpot for May 19, 2013 was $590,500,000.00. Wow!

• Actually, that number represents the amount a sole winner of the Powerball jackpot would receive as an annuity in equal installments over 30 years ($19,683,333.22 per year before taxes).
• The actual cash available from lottery ticket customers for the May 19, 2013 Powerball drawing after fees and the take from ticket distributors and the state was $370,896,780.54, the amount a single winner can take as a lump sum payment in lieu of the annuity. This is after paying an unknown amount to those selling the tickets (e.g., 7-elevens), $85,000 to the store that sold the winning ticket, and some amount that went to the state of Florida.
• The Florida state lottery web site says, “This series of POWERBALL jackpot rollovers generated more than $40 million for the Educational Enhancement Trust Fund.” That $40 million is over a series of six “rollovers” and the statement does not clarify how much went to education as a result of the “$590,500,000.00” Powerball event being reported. (And all you Floridians, keep in mind that lottery money going to “education” since inception of the state lottery has simply been a replacement of other funding sources, not additional funding for education.)
• When buying a ticket there is also no disclosure that you have to pay income taxes on the winnings. If a sole winner took the lump sum payment the net payment after Federal income taxes at 39.5 percent would be about $224,392,255.22. If a sole winner is a taxable resident of Manhattan, New York they would net about $200,000,000.00 after an additional 12.618 percent in taxes.
• The chances of winning are certainly material in making a decision to buy a lottery ticket but the odds of winning are not disclosed when purchasing lottery tickets. I had to poke around the Internet to locate the actual odds of the Powerball jackpot prize which are 1 in 175,223,510.

Certainly, enticing people to buy lottery tickets by overstating the value of the winnings, not disclosing the after tax value of the winnings, and failing to disclose the odds at the point of purchase must be regulated if the same types of abuse are regulated in consumer finance! By God!

Regards, Pete Weldon
americanstance.org

UPDATE: Holman Jenkins has a concise and insightful follow-up on this story in the WSJ.

The economics and political communities have recently gone bonkers arguing over details of a study that concluded economic growth declines as national debt reaches 90 percent of annual Gross Domestic Product (GDP). An acknowledged math error in the analysis is being used by Keynesians (borrowers and spenders) to undermine the credibility of the study. John Mauldin wrote a useful summary here.

I think something is missing in this supposed controversy, that being both common sense and reality.

Any analysis about the relationship between national debt and GDP is meaningless in the absence of accountability for the use of the debt and the means of paying it off.

If we borrow money to build a bridge that carries freight for 100 years faster than could be done in the absence of the bridge we have a winner. The carrying cost of the debt is expected to be more than offset over time by the efficiency (GDP growth) offered by the bridge. The same argument is made in support of the 1980’s military buildup credited with causing the Soviet Union to evaporate, leading to a very real peace dividend in the 1990’s as military spending contracted while the US economy grew like a daisy in Spring and the nation had annual budget surpluses from 1998 through 2001..

Borrowing money to expand food stamps to 20 million more people (which has been done) has saddled current and future productive citizens with the burden of principle and interest for the term of the borrowing in exchange for current consumption for those 20 million more people without any possibility of long term improvement in economic efficiency (GDP growth). Money borrowed to pay for the expansion of food stamp recipients comes from the private economy (or is created out of thin air and given a fancy name) but needs to be repaid with the product of productive enterprise in the form of future taxes that will be taken out of the private economy later. Any GDP impact of expanded food stamp consumption now is necessarily reversed upon taxation of productive endeavor to pay off the borrowing later.

This reality leaves us with anticipation of the BANG!, that being the point at which the level of debt and its use to fund current consumption on the backs of a dwindling supply of current and future productive citizens undermines the credibility of the currency to the point where the lenders go away, charge higher rates of interest, or simply don’t exist because they have put themselves in the same position.

What is it again that underlies the assured value of sovereign debt? Nothing much.

Regards, Pete Weldon
americanstance.org